Great blog posts about macroeconomics

The Rising Dollar vs Lower Gas Prices

Two major opposing forces have been affecting the US economy for the past several months. The drastic drop in oil prices is the first factor. Oil prices affect consumers in their driving habits which, in turn, influence spending and saving. In addition, businesses also feel the relief of lower oil prices, particularly the airline and shipping industries. The second force is the rising strength of the US dollar. Importers benefit from a strong dollar by buying more foreign goods but exporters are simultaneously hurt by the weakened sales abroad. Both of these phenomena play a role in national output or GDP. The question is: which of the two factors is dominating?

Unfortunately, the strong dollar is winning the battle. In other words, the negative impact from the dollar’s rise is reducing output. Earnings of publicly traded businesses are set to drop by 3.3% in the first quarter compared to last year’s numbers. This would be the largest drop since the recession. Meanwhile, exports have dropped by 1.4%. Economists speculated that the dropping oil prices would balance out the equation by boosting consumption but that has yet to happen. Consumer savings rose from 4.7% in the January and February of 2014 to 5.7% in the same period this year. People are channeling their money differently than expected and consumption is not rising to keep up with the drop in exports. Some economists believe that consumption is simply lagging behind because of the harsh winter that discouraged people from driving to shopping malls and retail stores. They hope that seasonality did not account for the full effect of the abnormal weather.

Since oil is such a big part of the US economy, the decline in gasoline prices has severely impacted the industry. Corporations are slowing down investment and laying off workers. It’s not just the businesses that are hit; communities that rely on the oil industry are edging towards a recession.

These two forces are putting pressure on the Federal Reserve which is trying to decide whether or not to raise interest rates. After being at nearly zero percent for the past six years, the Fed wants to increase the interest rate but is hesitant because of the growing concern regarding the strength of the dollar. The Fed will likely wait a few more months before raising interest rates and hope that consumption will rise due to lower gas prices.

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5 thoughts on “The Rising Dollar vs Lower Gas Prices”

Again a classic example of how politicians the public view of strength of dollar is to desire a stronger dollar than a weaker dollar when in reality, a relatively weaker dollar is more beneficial to the economy.

It will be interesting in the next year or two to see which has the greater effect. I remember reading the Saudis will continue peak production for the foreseeable future (around 10.4 billion barrels a day), which means perhaps crude oil prices will continue to fall and consumer spending will catch up with the effects of the rising dollar. However, if that happens domestic oil industries in states like North Dakota and Texas will be severely negatively impacted, but atleast all that frack-able shale isn’t going anywhere.

I’m interested to see if it would be possible for the low price of oil to counteract the strong dollar decrease in exports, but making exporting cheaper for those importing abroad. Meaning, if transporting the products abroad is cheaper because oil is cheap, could a decrease in price by domestic consumers entice abroad importers to make U.S purchases?

One thing i’m curious about is whether the U.S has any plans to address foreign currency manipulation other than increasing rates which would make the dollar even stronger. Addressing this issue would diminish the effects of imports > exports and help GDP.

Currency manipulation is a huge issue facing trade negotiators around the world with China being singled out most commonly as a culprit.

It should be noted that the GDP figures from last week also showed the effects of the higher dollar beating out any beneficial effects of lower oil prices. As the US becomes more self-sufficient in oil, the benefits of low oil prices for the nation as a whole get smaller and smaller.